The Consequences of the Global Financial Crisis This is an open access version of the publication distributed under the terms of the Creative Commons Attribution-NonCommercial- NoDerivs licence (http://creativecommons.org/licenses/by-nc-nd/3.0/), which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited. For commercial re-use, please contact [email protected] This page intentionally left blank This is an open access version of the publication distributed under the terms of the Creative Commons Attribution-NonCommercial- NoDerivs licence (http://creativecommons.org/licenses/by-nc-nd/3.0/), which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited. For commercial re-use, please contact [email protected] The Consequences of the Global Financial Crisis The Rhetoric of Reform and Regulation Edited by Wyn Grant and Graham K. Wilson 1 This is an open access version of the publication distributed under the terms of the Creative Commons Attribution-NonCommercial- NoDerivs licence (http://creativecommons.org/licenses/by-nc-nd/3.0/), which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited. For commercial re-use, please contact [email protected] 3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. 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For commercial re-use, please contact [email protected] Preface The economic and financial instability that has rocked Europe and North America since 2008 has been a disaster for millions of people who have lost jobs, homes, and savings. We are very conscious of the consequences of the Global Financial Crisis (GFC) on the lives of our fellow citizens. Unraveling the consequences of the GFC is a fascinating intellectual puzzle but we never want to forget that for the unemployed or newly homeless, the GFC has been far more than an academically interesting event. The GFC came after a long period of economic growth in both our countries. Withstanding the economic consequences of terrorist attacks, the advanced democracies enjoyed some sixteen years of success. That success was not shared equally; income inequality increased as many middle- or low-income people saw their incomes stagnate while higher income groups, particularly the very highest incomes groups, made dramatic gains. Nor did governments take full advantage of these years of plenty. In particular, both the United Kingdom and the United States ran large deficits in their public sector budgets creating massive levels of government indebtedness at a time when balanced budgets and deficit reduction should have been the goals. In consequence, the United Kingdom and the United States entered the GFC encumbered with deficits and debts that constrained the ability of their governments to respond effectively to its challenges. However, while terrorism and wars preoccupied governments in the first decade of the century, the economy seemed blessedly to be taking care of itself. Clearly in retrospect, governments were mistaken in this. Failures to regu- late effectively allowed financial institutions to build houses of cards that would soon collapse. Governments tolerated the creation of a bubble in the housing market sustained by vast amounts of easy credit, perhaps linked to global financial imbalances. The determination of the Chinese government to hold down the value of its currency by recycling trade surpluses into vast purchases of US Treasury bonds was probably linked to this oversupply of easy credit. However, it was more attractive to governments to think that economic prosperity was due to the wisdom of their policies. In particular, the long period of growth coincided with and therefore could be seen as being due to v This is an open access version of the publication distributed under the terms of the Creative Commons Attribution-NonCommercial- NoDerivs licence (http://creativecommons.org/licenses/by-nc-nd/3.0/), which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited. For commercial re-use, please contact [email protected] Preface the neoliberal, “Washington consensus” orthodoxy that dominated eco- nomic policy thinking in this period. Its prescription of facilitating market forces through less regulation, lower taxes, and reduced government interven- tion in the economy seemed to be demonstrably effective. In particular, the United Kingdom, once derided as the sick man of Europe, economically moved ahead of the continental economies in terms of per capita incomes because, it seemed, it had adopted neoliberal economic policies under Thatcher and continued a version of them under Tony Blair’s “New Labour” government. This book originated in discussions between us in which we assumed that the GFC would prompt a wave of new thinking. It seemed reasonable to assume that the GFC would cause a reconsideration of the neoliberal policies that had either failed to prevent or arguably caused the crisis. A combination of criticism of lax regulation and the adoption of policies such as the nation- alizations of banks and auto companies decidedly at variance with neoliberal approaches suggested that a fundamental reconsideration of public policy thinking might be under way. The fact that these policy changes were made by the most unlikely people—a conservative Republican President in the United States and Prime Minister Gordon Brown who had been one of the architects of “the New Labour Project” in the United Kingdom, strengthened the plausibility of our expectation of new approaches in public policy. We also thought that the dramatic initial responses of governments, such as the nationalizations of General Motors and Royal Bank of Scotland, and the Troubled Asset Relief Program (TARP), would prompt a reconsideration in academic circles of categorizations of political economies which seemingly made these policy developments in the United Kingdom and the United States impossible. In particular, the fashionable view that the “Anglo Saxon” economies had a variety of capitalism in which the state was aloof and non- interventionist in market forces seemed difficult to reconcile with events. We therefore sort to examine what the GFC had done to established thinking in both government and academic circles about economic policies and political economies. In the event, we have found much more stability than change in public policy. Given the extent of the shock to the world economy that the GFC constituted, this is a surprising outcome that we have tried to explain. It is impossible to use yet again the Sherlock Holmes question: Why didn’t the dog bark? Why did a crisis that began in the United States under a Republican administration dedicated to lax regulation not result in a sharp shift toward the left in politics and activist government in policy? We remain convinced that our expectation of change was warranted and its absence is therefore to be explained. vi This is an open access version of the publication distributed under the terms of the Creative Commons Attribution-NonCommercial- NoDerivs licence (http://creativecommons.org/licenses/by-nc-nd/3.0/), which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited. For commercial re-use, please contact [email protected] Preface The book follows attempts to provide that explanation. It is the product of cooperation between the University of Warwick in the United Kingdom and Boston University in the United States. This cooperation is truly organic. Unaided by the governments of either country, it represents a realization that both institutions will gain in strength by working together. This project brought together people with complementary expertise most of whom did not know each other previously. Workshops were held at Warwick University in December 2009 and at Boston in 2010. We wish to thank the people in both institutions who made this cooperation possible, particularly Vice President and Associate Provost Andre Ruckenstein, Professor Kevin Smith and Dean Virginia Sapiro at Boston, and Richard Higgott at Warwick.